What Emefiele, Adeosun must do for Nigeria

It is no longer news that Nigerian economy is at a brink of recession. The nation’s real Gross Domestic Product (GDP) growth rate declined to -0.36 per cent in the first quarter of this year compared to 2.11 per cent in the last three months of 2015, the National Bureau of Statistics (NBS) disclosed recently.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

This negative GDP growth apparently confirms an earlier statement by the Minister of Information, Alhaji Lai Mohammed that the Federal Government was broke and making tough adjustments.

He had said that the decision to increase the pump price of Premium Motor Spirit (PMS) from N86.50 to N145 per litre was one of those decisions to free funds for government’s other financial obligations.

By this negative growth rate, the country appears to be on a recessionary track as it requires one more negative growth rate in the next quarter to enter into recession.

The 2016 budget was designed to reflate the economy in order to steer it out of the path of recession. To get this done, there must be proper coordination of fiscal and monetary policies. This is not the time to claim superiority of one policy initiative over another as is always the case in Nigeria. It is in this regard that the Minister of Finance, Mrs Kemi Adeosun and Mr Godwin Emefiele, the CBN governor, must of necessity, have to work hand in hand. They must meet regularly and possibly carry other financial regulators along in the bid to stabilise the economy.

Kemi Adeosun

The Federal Government through the Ministry of Finance intends to reflate the economy but the CBN believes that the banking system is already awash with excess cash. The Federal Government’s release of N350 billion into the economy after the budget was passed has further increased the cash in the system. What this means is that inflationary pressure in the economy will be high this year and the CBN will have to deploy all arsenal at its disposal to fight inflation as the economy is facing stagflation.

It is in a state where there is no growth but there is high inflation. This will be counter productive to the bid by the government to create jobs and reduce unemployment as the CBN mopping cash from bank will constrain banks’ ability to lend. As it looks, while the Federal Government will be targeting increased spending, the CBN will be busy mopping up cash in the system in order to tame the general rise in prices of goods and services.

It appears as if the CBN and the Ministry of Finance will be working at cross purposes. The Ministry of Finance and the CBN need to approach this issue with caution in order not to derail the 2016 budget plan of steering the economy away from the path of recession. The goals of any macro economic policy is to achieve full employment of resources, balance growth, stable prices of goods and services, stable exchange rate and balance of payment. In the real world, these policy objectives conflict with one and another and require regular harmonisation.

In most other countries, there is legislation that compels the fiscal and monetary authorities to sit on the same table to harmonise their policies before they are announced. In Nigeria, there is no known legislation that compels the Ministry of Finance and the CBN to harmonise their policies before they are implemented. Over the years, the success of either monetary or fiscal policy in Nigeria depends on the imperative of their coordination.

A careful observer will note that it is only at the lower level of staff of the Ministry of Finance and the CBN that you find some level of cooperation and coordination but when it comes to the key personnel, you find some discordance. It is worrisome if the principal actors in the monetary and fiscal arena are aware of what in macro economics is referred to as the unholy trinity or the macro economic trinity. Under this trinity, the argument is that no central bank on earth manages the three key macro economic aggregates.

Central Bankers are quick to say that no central bank has responsibility for managing inflation, at the same time delivering a fixed exchange rate or a definite level of the exchange rate and then deliver a regime of low interest rate in any economy. Bankers will always remind you that a central bank can only achieve two of the three and let the other go, it cannot control all three.

From recent history, the CBN has been having a curious eye on developments in the exchange rate; but for interest rate, it does not control interest rate as of today because of the deregulation of the economy in 1986. Nigerians and government officials have been hampering on single digit interest rate, which has been a mirage due to high level of inflation in the country.

Nigerian economy can only experience a situation where interest rate is hovering around two percent, inflation is around two percent and a stable exchange rate, when the economy is developed. It will be possible also when Nigeria diversifies its economy not the present mono product economy that it is today. It will also be possible to have low interest rate if it is not an import dependent economy and the level of infrastructure is highly developed.

The only countries that fall into this category are the US, UK, Japan, that is where you have low interest rate because the infrastructure is already there, the banks do not need to invest in any form of infrastructure. If the CBN tries to mange the three unholy trinity simultaneously, it cannot achieve success in any one of them, it will be a huge failure.

It is in shaping the direction of policy that the CBN governor and the minister of finance need to cooperate and work hand in hand to shape fiscal and monetary policies in a way to achieve the desirable result. The two principal officers must meet on regular basis to review the economy and find out where each is missing it and fix the issue. It is in so doing that this government will achieve its economic objective of delivering dividend of democracy to the people of Nigeria.

In fact, the National Assembly should come up with a legislation that will compel the CBN management team and that of the Federal Ministry of Finance to meet and harmonise the nation’s economic and monetary policies before they are announced and implemented. The law should also compel them to meet quarterly to review policies and take corrective measures that will benefit the economy.

It is in the interest of Nigeria and Nigerians for this government to create a stable polity. Nigeria as a country should create institutions because the President will use his tenure and go, the Governor of CBN will leave at the end of his tenure. If Nigeria has enduring institutions, individuals will come and go but institutions will always remain. That is what has guided other countries that have developed which some of us look up to and are running to because Nigerians think that they have done so well not minding that it is the effort of their citizens that brought them to where they are today.